So called Financial Planning Specialists are continuing to cause tax problems for my clients. But their newest scam has a tax law side that all should know about.
Before diving in, let’s review some basics on SEP IRA’s…
1 – For the 2025 tax year, the Simplified Employee Pension (SEP) IRA Contribution Limit is the lesser of 25% of an employee’s compensation or $70K. For self-employed individuals, this is based on net earnings, with a maximum compensation limit of $350K.
2 – The percentage limit for contributions varies on how the plan is set up, but cannot exceed 25% of compensation.
3 – Excess contributions to a SEP IRA in 2025 are generally subject to a 6% excise tax penalty on the overcontributed amount, calculated annually until removed. If the funds are never removed, then this additional tax is paid in perpetuity. To avoid this, excess funds plus any earnings must be withdrawn by the tax-filing deadline (including extensions).
4 – Any income earned on the excess contribution must be withdrawn and reported as taxable income in the year the contribution was made.
5 – Thanks to the SECURE 2.0 Act, earnings removed by the tax-filing deadline are not subject to the additional 10% early withdrawal penalty for taxpayers under 59½.
6 – If the excess cannot be returned, a 10% penalty may apply.
7 – SEP IRA contributions must be made by the S Corp to be deductible at the corporate level, as they are considered employer contributions rather than personal ones.
Let me leave you with this…
SEP IRA’s have become incredibly popular in small business settings because they’re flexible, have no on-going maintenance costs, and the contributions aren’t subject to Social Security and Medicare Costs. But now, the investment people are using these rules to hurt my clients.
In one instance, my self-employed client was convinced to write a $140K check to cover two years of contributions for himself only. This was supposed to be a $35K employee contribution with a 100% match by the company for two years.
Of course, he only had a $25K W-2 in 2025. Based on his W-2, it should only have been a total contribution of $12,500 for 2025 with a similar amount for 2026.
In the second instance, the client wrote a $70K check for a 2025 contribution again only for himself. This was based on a $40K W-2 that would only sustain a deposit of $20K.
In both of these instances, when I notified the clients of the tax law infraction, they emailed their stock jockeys who in turn replied with so-called “tax advice” supporting the contribution. How could anyone in their right mind, even suggest that it’s fine to make a $70K retirement plan contribution based on a $25K W-2?
Of course, we have a problem. A blind man could se it from outer space.
There are a couple of lessons to be learned from these instances…
1 – Don’t believe the tax advice given to you by a commission-only salesperson. Ask an expert who can be trusted.
2 – When it comes to tax law, if it sounds too good to be true, it probably is.
As always, if you’re having difficulties with your accounting and tax work, please contact me today. We’d love to help.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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